In recent years, we’ve seen stress testing become an increasingly common action step taken by wealthy families and their advisors. At its core, stress testing is a formal process designed to put a wealth plan (or certain components of it) through its paces. That means evaluating and assessing it to see if the strategies being used are likely to achieve a wealthy family’s key financial goals and objectives.
Often that’s done by examining how a wealth plan would likely behave in a variety of scenarios—both positive and negative—that would have an impact on it. The goal is to ensure that the plan doesn’t spring any unpleasant surprises on the family.
Stress testing also seeks to identify any strategies or opportunities that are currently being overlooked in the plan but that could add significant value to the family’s financial life. The goal here is to take what’s already working and fine-tune it to make it work even better.
A major benefit of stress testing is that it can help put various financial strategies and efforts together to create a comprehensive picture. Some families implement their wealth solutions piecemeal—using multiple professionals who rarely (if ever) work together on the families’ behalf. It’s a bit like building a house but having different construction companies build each room without ever coordinating their efforts. A stress test can examine how well the various solutions in place are working together—or not—and identify ways to better coordinate efforts.
FROM THE VERY RICHEST TO THE REST OF US
As with so many financial resources, stress testing really got its start among some of the wealthiest families— such as the Super Rich (people with a net worth of $500 million or more). Not surprisingly, many families whose wealth wasn’t in the hundreds of millions (or even tens of millions) of dollars saw the value of stress tests and wanted in. As more and more wealth management strategies and products become available to individuals and families that are significantly less affluent than the Super Rich, it makes sense that stress testing is gaining traction. The downside, however, is that we’ve noticed a troubling trend. As stress testing becomes more commonplace, it’s not always being done with as much focus and rigor as it could be—or as is necessary, in some cases. As a result, faults, errors and missteps can be made by some professionals who proclaim they are adept at the process but who don’t fully grasp stress testing. This has led to some substandard outcomes.
THE RIGHT COMBINATION
We believe technically skilled professionals who understand what stress testing really is (and is not) and who have a keen awareness of the human aspect of wealth planning are the best people to conduct stress tests for you. These professionals are, generally, best-positioned to actually deliver the significant value that a well-conducted stress test can offer you and your family.
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